Define opportunity cost. Using the table above, calculate the opportunity cost of bicycles in terms of boots and the opportunity cost of boots in terms of bicycles for each of the countries.

Microeconomics
13th Edition
ISBN:9781337617406
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter20: International Trade
Section20.1: International Trade Theory
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Trade theories suggest that both countries gain from trade. In a 2-country, 2-good model, we assume the 2 states—Futland and Tandam share a common currency (allowing us to ignore exchange rate), they both have the same wages, and they both produce two goods: bicycles and boots. The units of labour requirement are shown below, assuming constant returns to scale.

 

 

Production Techniques:

Units of labour hour required per unit output

 

Tandom

Futland

Bicycles

90 hours

120 hours

Boots

30 hours

50 hours

 

  1. Define opportunity cost. Using the table above, calculate the opportunity cost of bicycles in terms of boots and the opportunity cost of boots in terms of bicycles for each of the countries. 
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